Ruhr Economic Papers

Ruhr Economic Papers #50

The Impact of FDI on Innovation in Target Firms

by Joel Stiebale and Frank Reize

RWI, 07/2008, 35 S./p., 8 Euro, ISBN 978-3-86788-053-4



This paper contributes to the ongoing debate on the welfare effects of foreign direct investment by investigating the effects of cross-border mergers and acquisitions on innovation activities in target firms. The empirical analysis is based on survey and ownership data for a large sample of small- and medium- sized German firms. After controlling for endogeneity and selection bias, it is found that foreign takeovers have a large negative impact on the propensity to perform innovation activities and a negative impact on average R&D expenditures in innovative firms. Furthermore, innovation output, measured as the share of sales from product innovations is not significantly affected by a foreign takeover for a given amount of innovation efforts. Hence, the estimation results do not show any evidence of significant technology spillovers through foreign direct investment in form of a higher innovation success.

JEL-Classification: D21, F23, G34, C31

Keywords: Multinational enterprises; mergers and acquisitions; innovation